What is your employment compensation philosophy? Do employees understand it? When you tackle the issue of fair compensation administration, there are many considerations. In a BLR webinar titled "Market-Based Compensation in 2012: How to Attract and Retain the Best Employees," Kimberly Keating outlined some guidance for creating a sound employment compensation policy. She gave us 10 questions to help define the employment compensation philosophy that will work for your organization.

What is an Employment Compensation Philosophy?

An employment compensation philosophy, Keating advised, "is a set of principles, and those principles are based on the values that drive compensation decision-making." A well-crafted employment compensation philosophy helps tell the story of who you are as an organization and what you value as an organization. It will:

• Define the organization’s commitment to valuing employees
• Define desired market or pay position
• Be used as key tool to attract, retain and motivate staff
• Combine the use of base salary, variable or incentive pay (where appropriate), and non-cash rewards (i.e. benefits)

"Ideally, a compensation philosophy," according to Keating, "should be consistent across all the different areas in an organization. Across departments, across different roles. While it may not be the same labor market or there may need to be differences in how a compensation philosophy is applied for different departments, having the same values transcend the different departments is the really important part."

Typical Employment Compensation Philosophy Objectives

Typical compensation philosophy objectives include:

• To realize internal equity by looking at the relative worth of comparable of positions within the organization using job rankings, job classifications, or a point system
• To achieve external equity (to the extent possible) by looking at fair or competitive pay relative to the external market
• To develop compensation practices that are fair, objective, transparent and legally defensible
• To develop a compensation process and system that can be easily maintained and updated

10 Questions to Answer for a Sound Employment Compensation Philosophy

1. What are the goals of the compensation plan?
2. How do you define compensation?
3. With whom do you compete for talent?
4. What is your targeted competitive position in the market?
5. How will you balance internal equity versus external competitiveness?
6. What role will performance play in your program?
7. What will be the mix of compensation?
8. What role will line managers play in compensation administration?
9. What will you communicate to your employees?
10. To what extent should senior leadership commit to the compensation philosophy?

When answering these 10 questions, step back and observe how the answers interrelate. For example, answers on performance relate to answer on mix, since variable pay often depends on a pay-for-performance strategy. When all of the components integrate, the result is a sound compensation philosophy that helps you use rewards to drive organizational success.

For more information on creating fair employee pay, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

Kimberly Keating is the founder and managing director of Keating Advisors. She has extensive experience in broad-based compensation, performance management, and organizational behavior. She has consulted with numerous organizations in designing systems to support their business strategy and build a competitive advantage.